Government Allows 20% FDI in IPO Bound LIC

On Saturday, 26 February 2022, the UNION Cabinet passed an amendment to the Foreign Direct Investment (FDI) policy to clear up to 20% FDI in the Life Insurance Corporation(LIC) under automatic route.

This came before its much-awaited IPO (initial public offering), which is expected to be the greatest in the nation’s market so far.

Keep reading to know more!

What About the FDI Ceiling in LIC?

The existing Foreign Direct Investment Policy does not recommend any particular provision for FDI in LIC that is incorporated under the LIC Act, 1956. The limit for LIC is now equivalent to that of public sector banks.

While the Central Government had increased the FDI ceiling in the insurance industry last year from 49% to 74%, it didn’t include LIC, which is regulated by particular legislation. Since, according to the current FDI policy, public sector banks’ FDI ceiling is 20% through Government approval avenue, it has been prescribed to keep up to 20% foreign investment for LIC and other corporate bodies.

Further, to accelerate the capital raising procedure, FDI has been allowed through the automatic route, just as in the case of the remaining insurance industry. Foreign investors may be eager to participate in LIC’s IPO, and this would offer foreign investment in LIC and other corporate bodies. The Government may need this for disinvestment purposes.

How Did the Share Market Respond?

On Friday, 25 February 2022, the National Stock Exchange (NSE) decided to relax Nifty equity indices’ eligibility terms. For replacing stocks in several indices, it minimised the constituents’ minimum listing history to one month from three months, effective 31 March.

This relaxation will give way to LIC’s inclusion in the recognised Nifty 50 Index. Since various passive funds allocate their investments to index stocks and indices, this decision, along with foreign investment approval, is likely to bring forth large inflows in LIC’s offering.

What Is the Government’s Expectation?

Once SEBI approves the public issue, the IPO is expected to open for subscription during the 2^nd week of March, with trading commencing by the 3^rd week. The Government is proceeding with LIC’s listing, despite rising global concerns amidst the Russia-Ukraine war and increased market volatility.

With this move and other adjustments in FDI policy, the Government desires to create India a lucrative investment hub. India’s FDI inflows rose from $74.39 billion in FY 2019-20 to $81.97 billion in FY 2020-21. Further, this FDI policy reform will enhance the nation’s ease of doing business, leading to the growth of employment, income and investment.

Know About India’s FDI Regulations for the Insurance Sector!

FDI in presently permitted industries is allowed up to the ceiling specified against each activity/industry subject to applicable regulations/laws. Under policy rules, insurance has been a permitted industry. However, it only lists ‘intermediaries or insurance intermediaries’ and insurance companies under the insurance industry. Since LIC is a statutory corporation, it is not included under any of these.

Besides, no ceiling is recommended for FDI in LIC under the Insurance Regulatory and Development Authority Act, 1999, the Insurance Act, 1938, the LIC Act, 1956 or the guidelines made under the corresponding Acts. So, this specific amendment clears 20% FDI in LIC.

Mr. Tuhin Kanta Pandey, secretary of DIPAM (Department of Investment and Public Asset Management), stated that this 20% FDI would be sufficient, keeping in mind the existing requirements and regulations. According to him, since LIC isn’t an insurance entity, insurance laws are not strictly applicable for it, other than some specific provisions that are mentioned in the LIC Act.

They’ll have to keep 51% by law without going below it. Even after proceeding with an IPO, they can dilute up to 25% in the first 5 years. Further, no single individual can own above 5%. So, an FDI of 20% will be far from better for that route.

Get an Insight into LIC’s IPO!

The IPO of 31.62 crores equity shares consists of the policyholder reservation part, employee reservation part and the net offer. It works out to nearly 5% of 632.49 crores shares (total capital), with the Government keeping the outstanding 95%.

Employees will get a reservation of up to 5% of the offer, while eligible policyholders will get a reservation of up to 10%. Employees and policyholders can get shares with a discount. LIC’s IPO will also facilitate a reservation of at least 35% for retail investors.

The insurance giant can allocate a maximum of 60% of the qualified institutional buyers (QIB) portion on a discretionary basis to anchor investors. Domestic mutual funds can access a reservation of 1/3^rd of the anchor investor part.

Bottom Line

With only a month left for the fiscal year to end, the Government is trying its best to make the LIC IPO a hit. Permitting FDI will enable foreign portfolio investors to buy shares from the secondary market. Besides, it sends an optimistic and promising signal to investors.

Go through Angel One blogs to get the latest updates about the stock market, IPOs and investment.

Frequently Asked Questions

1. How much money can the Government mobilise from LIC’s share sale?

The Government is likely to mobilise between Rs. 63,000-Rs. 66,000 crores from LIC’s share sale for meeting its disinvestment target of nearly Rs. 78,000 crores for the financial year 2022.

2. What can be the price band for LIC?

As per market estimates, the price band of LIC’s public issue can be between Rs. 2,000- Rs. 2,100. However, LIC hasn’t yet announced its IPO’s price band.

3. What was the share capital growth for LIC in September 2021?

The share capital of LIC was raised from Rs. 100 crores to around Rs. 6,324.99 crores during September 2021.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.